Quotes of the day

U.S. prosecutors are investigating whether Morgan Stanley misled investors about mortgage-derivatives deals it helped design and sometimes bet against, people familiar with the matter said, in a step that intensifies Washington's scrutiny of Wall Street in the wake of the financial crisis. Morgan Stanley arranged and marketed to investors pools of bond-related investments called collateralized-debt obligations, or CDOs, and its trading desk at times placed bets that their value would fall, traders said. Investigators are examining, among other things, whether Morgan Stanley made proper representations about its roles.--AMIR EFRATI, SUSAN PULLIAM, SERENA NG And AARON LUCCHETTI

Is this how Americans believe their government should act? Do they believe that all of the rules related to equity and fairness in the judicial system should be thrown aside, as the government pursues its vendetta against Wall Street through leaks to the press? Are we now in an era when government can slander and destroy reputations by attacking people with press leaks?--Dick Bove

Morgan Stanley’s overall mortgage bets resulted in multi-billion dollar mortgage-related losses in 2007 and 2008, which brought the firm to the brink of collapse. Goldman and Paulson profited handsomely from their mortgage bets. That in large part explains why Goldman, Tourre and Paulson are such targets of public and lawmaker anger, and why Morgan’s traders will likely remain footnotes in the history of the mortgage collapse.--Michael Corkery

Suppose that we misspecified the underlying probability of mortgage default and we later discover the true probability is not .05 but .06. In terms of our original mortgages the true default rate is 20 percent higher than we thought--not good but not deadly either. However, with this small error, the probability of default in the 10 tranche [of the pooled CDO] jumps from p=.0282 to p=.0775, a 175% increase. Moreover, the probability of default of the CDO jumps from p=.0005 to p=.247, a 45,000% increase!--Alex Tabarrok

The main issue is the long-term deficit. As societies become richer, citizens tend to want better schools, better medical care and other government services. This country is following that pattern, but without paying the necessary taxes. That combination has us on a course to Greece-like debt. As a rough estimate, the government will need to find spending cuts and tax increases equal to 7 to 10 percent of G.D.P. The longer we wait, the bigger the cuts will need to be (because of the accumulating interest costs). Seven percent of G.D.P. is about $1 trillion today. In concrete terms, Medicare’s entire budget is about $450 billion. The combined budgets of the Education, Energy, Homeland Security, Justice, Labor, State, Transportation and Veterans Affairs Departments are less than $600 billion. This is why fixing the budget through spending cuts alone, as Congressional Republicans say they favor, would be so hard. Representative Paul Ryan of Wisconsin has a plan for doing so, and it includes big cuts to Social Security and the end of Medicare for anyone now under 55 years old. Other Republicans have generally refused to endorse the Ryan plan. Until that changes or until the party becomes open to new taxes, its deficit strategy will remain unclear.--David Leonhardt

Before his arrest on corruption charges, Wang Yi was not only a powerful financial official in the Communist party but also one of China’s most celebrated modern classical music composers. ... Mr Wang is described now as someone who has trouble reading music, had no formal training and was reliant on ghost writers to produce what was once hailed by state media as “China’s answer to Mozart” and “music for rejuvenation of the nation”. Official reports suggest that most of the millions of renminbi spent on tickets to see Mr Wang’s works came from businesspeople and officials hoping to curry favor with him. The case is one example of the extraordinary influence senior party officials with few or no artistic credentials wield over the Chinese arts. Critics say these factors are the main reason China, the world’s biggest exporter of manufactured goods, has produced relatively few cultural or artistic exports in recent years – despite a multibillion-dollar global campaign and regular exhortations from leaders to develop the “cultural industries” and “soft power” of the nation. ... In the wake of the hugely successful animated film Kung Fu Panda, prominent Chinese media commentators published a string of soul-searching articles asking why such a film was made in Hollywood instead of China, even though all the themes were Chinese. Critics such as Mr Peng and Mr Ai say government control and the conditions illustrated by the Wang case are two key reasons.--Jamil Anderlini

We all looked up to John [Lennon]. He was older and he was very much the leader; he was the quickest wit and the smartest and all that kind of thing. So whenever he did praise any of us, it was great praise, indded, because he didn't dish it out much. If ever you got a speck of it, a crumb of it, you were quite grateful. ... When the four of us got together, we were definitely better than the four of us individually. One of the things we had going for us was that we'd been together a long time. It made us very tight, like family, almost, so we were able to read one another. That made us good. It was only really toward the very end, when business started to interfere. ... We were the biggest nickers in town. Plagiarists extraordinaires. ... George [Harrison] wrote [Taxman] and I played guitar on it. He wrote it in anger at finding out what the taxman did. He had never known before then what could happen to your money. ... People always thought Lucy in the Sky with Diamonds was [an LSD song], but it actually wasn't meant to say LSD. It was a drawing that John's son brought home from school. Lucy was a kid in his school. ... I wrote [Back in the USSR] as a kind of Beach Boys parody. And Back in the U.S.A. was a Chuck Berry song, so it kinda took off from there. I just liked the idea of Georgia girls and talking about places like the Ukraine as if they were California, you know? It was also hands across the water, which I'm still conscious of. 'Cause they like us out there, even though the bosses in the Krelmin may not. The kids do. And that to me is very important for the future of the race.--Paul McCartney

If God does not exist then — in light of the hidden hand that events have placed on the shoulders of these two new leaders, paving their way and staying their enemies — Nick Clegg and David Cameron may this weekend think it necessary to invent Him.--Matthew Parris

Like Robert Peel’s decision to repeal the Corn Laws, and split the Conservative Party for a generation, or Stanley Baldwin’s gentle manoeuvring to install the first Labour Government in 1924 and thus dish the Liberals, David Cameron’s generous offer to the Liberal Democrats has changed British politics for ever. Whether it succeeds or not. On Friday morning, as he surveyed the election result, Cameron was able to see that the new arithmetic of the House of Commons represented both a huge challenge and a big opportunity. And the decision he made — to treat it as an opportunity — will be the making of him or the breaking of him.--Daniel Finkelstein

I was surprised and impressed that [Gordon] Brown did not have to be stretchered out of Number 10 under heavy sedation--that he was willing to sacrifice what was left of his career, his reputation beyond redemption, to keep Labour in power. I had thought him less principled than that.--Clive Crook

The central issue is what you do when you notice many other people doing something that bothers you. If you believe that government should address the issue, then you belong to the Church of Unlimited Government. ... I think that most Americans are in that Church, and that it is the established Church in our schools and universities.--Arnold Kling

It is not the role of the ECB, IMF, or Federal Reserve to bail out banks. These measures are profoundly unpopular with voters in countries such as Germany and the United States. I think it is incumbent on the architects of these measures to communicate what is the structural defect in banking regulation that made such intervention necessary, and what reforms have been implemented to ensure that such measures won't be needed again.--James Hamilton

High social rank, as noted, has substantial instrumental value, and low social rank entails substantial concrete costs, irrespective of whether people care about rank per se. Forcing a productive person to buy more social rank than he wants is objectionable, but the alternative is to give all of society’s most productive members a valuable asset free of charge. That asset would command a high price in the libertarian’s ideal world in which purely voluntary societies could form and dissolve at will. And since its value is a direct consequence of the substantial costs associated with low social rank, a society without redistributive taxation should strike libertarians as even more objectionable.--Robert Frank

I am shocked to see an economist talking about “enough for everyone.” What do those words mean? Additional medical services would produce some benefit well past the point at which the entire GNP is spent on them. As you have just conceded, what matters is not whether I get the best care but how good the care is that I get. When my absolute real income increases but my relative income decreases, I can afford better care than before, even if other people can afford care better still. So, in the case of medical care, it is absolute not relative that matters. ... If everybody gets richer, the quality of schools can increase everywhere. You are again confusing absolute and relative. The richer people will still, on average, have better schools--but the “worse” schools can be producing education as good as, or better than, the best schools used to produce. ... Your claim is correct only with regard to the status output, not the schooling output. If you go to Harvard and I to Cornell, that may result in your winning out over me in our courtship of the woman both of us wish to marry. It may result in people who happen to know our backgrounds treating you with more deference than they treat me. I do not know if it has occurred to you, but one implication of your argument is that spending on schooling, insofar as it produces status, imposes a negative externality on others, so private individuals will tend to buy a more than optimal quantity of schooling for their children. It follows, on straightforward economic lines, that instead of subsidizing schooling, as we do on an enormous scale, we ought to tax it. If schooling is “inescapably relative,” we could cut every school’s expenditure in half and still produce the same amount of education, relatively speaking, while saving many billions of dollars. Perhaps that should be the subject of your next op-ed.--David Friedman

... let’s take a look at the $1 bill I am holding in my hand. It says right at the very top, “Federal Reserve Note.” It also says right down here, “This note is legal tender for all debts, public and private.” This is what the public ex-ante wants: the knowledge that they can turn their deposits into these Federal Reserve Notes. And if the public knows they can turn them into these notes, they don’t. With me here? If I know I can, I don’t. ... So, bottom line, [after the August 2009 run] you had the Fed step up and provide its public good to the Shadow Banking System. You had the FDIC step up and do the same thing with its public good. And as Paul Volcker was noting this afternoon, you had the Treasury step up and provide a similar public good for the money market mutual funds, using the Foreign Exchange Stabilization Fund. It was a triple-thick milk shake of socialism. And it was good. Again, I’m not being pejorative. I’m being descriptive. ... When my son turned 18, he said, “Dad, I’m now the age of majority and I can do whatever I want.” I said, “Son, that’s absolutely true. However, I still control the Bank of Dad. And if you want to have access to the Bank of Dad, there are going to be rules. If you don’t want access to the Bank of Dad, that’s fine. But if you want access to the Bank of Dad, there are going to be rules.” ... Yes, think in terms of the Federal Reserve and the FDIC and the Treasury as all providing public goods to banking. But the Federal Reserve has got to be at the top of the totem pole, because the Fed truly is the Bank of Dad. The entity that can print money has got to be the lead supervisor. To me, it’s unambiguously clear. And the fact that it’s being debated actually befuddles me. I operate on the notion that self-evident truths should be self-evident. But apparently Washington doesn’t operate on that thesis.--Paul McCulley

Think of eminent domain as the bastard child of Joseph Stalin and Richard Posner. In 2005, the Supreme Court ruled in Kelo versus New London that the government could take your property and give it to a private corporation if that corporation could prove it would bring in more revenue.--Shooting War

There he was, a short, beefy guy with a goatee and a Red Sox cap and a thick Boston accent, and I suddenly learned that I didn’t have the slightest idea what to say to someone like him. So alien was his experience to me, so unguessable his values, so mysterious his very language, that I couldn’t succeed in engaging him in a few minutes of small talk before he got down to work. Fourteen years of higher education and a handful of Ivy League degrees, and there I was, stiff and stupid, struck dumb by my own dumbness. “Ivy retardation,” a friend of mine calls this. I could carry on conversations with people from other countries, in other languages, but I couldn’t talk to the man who was standing in my own house. It’s not surprising that it took me so long to discover the extent of my miseducation, because the last thing an elite education will teach you is its own inadequacy. ... because these schools tend to cultivate liberal attitudes, they leave their students in the paradoxical position of wanting to advocate on behalf of the working class while being unable to hold a simple conversation with anyone in it. Witness the last two Democratic presidential nominees, Al Gore and John Kerry: one each from Harvard and Yale, both earnest, decent, intelligent men, both utterly incapable of communicating with the larger electorate. ... Graduates of elite schools are not more valuable than stupid people, or talentless people, or even lazy people. Their pain does not hurt more. Their souls do not weigh more. If I were religious, I would say, God does not love them more. The political implications should be clear. ... The elite like to think of themselves as belonging to a meritocracy, but that’s true only up to a point. Getting through the gate is very difficult, but once you’re in, there’s almost nothing you can do to get kicked out. Not the most abject academic failure, not the most heinous act of plagiarism, not even threatening a fellow student with bodily harm—I’ve heard of all three—will get you expelled. ... For the elite, there’s always another extension—a bailout, a pardon, a stint in rehab—always plenty of contacts and special stipends—the country club, the conference, the year-end bonus, the dividend. If Al Gore and John Kerry represent one of the characteristic products of an elite education, George W. Bush represents another. It’s no coincidence that our [former] president, the apotheosis of entitled mediocrity, went to Yale. ... if you’re afraid to fail, you’re afraid to take risks, which begins to explain the final and most damning disadvantage of an elite education: that it is profoundly anti-intellectual.--William Deresiewicz

Even though I hope I have persuaded you that purely economic measures of personal well-being are not as narrow as sometimes thought, I have so far dodged the key questions: Ultimately, what makes us happy? What makes our lives satisfying in the long run? And, more subtly, how is the state of mind we call happiness, at least as social scientists define the term, related to our long-run life satisfaction? We can look inward for answers, but, at least for someone trained as a social scientist, the most direct way to tackle the question is just to go out and ask people--lots of people. ... The results of these studies are quite interesting. One finding is that most people consider themselves to be reasonably happy, despite the undeniable hardships that many people face. ... Perhaps people don't want to admit to survey-takers that they are unhappy, but the explanation preferred by most researchers is that human beings are intrinsically very adaptable and are able to find satisfaction in their lives even in very difficult circumstances. ... Ultimately, life satisfaction requires more than just happiness. Sometimes, difficult choices can open the doors to future opportunities, and the short-run pain can be worth the long-run gain. Just as importantly, life satisfaction requires an ethical framework. Everyone needs such a framework. In the short run, it is possible that doing the ethical thing will make you feel, well, unhappy. In the long run, though, it is essential for a well-balanced and satisfying life.--Ben Bernanke

I think it's better to date [in Washington, DC] if you are male. Government attracts a disproportionate share of intelligent women. I've never lived in New York, but there are so many celebrities, billionaires. If you are a guy in New York, there's always another guy that crushes you on the scale. Here, there are all these politicians but they are really out of commission for the most part -- or if they fool around, it's with interns. You don't have to compete with them. The people who are really high status are off the market. As a male in Washington, you can be high in status fairly easily without the true very high status competing. In New York or L.A., there are movie stars and directors. Even if a woman can't be with a movie star, women can still say, 'Gee, this guy or that guy is not a movie star or a director.' There's lobbyists and lawyers here, a lot of them. You can be more interesting than that. This is a great place to live.--Tyler Cowen